Subprime perils ignored by everyone

Subprime perils ignored by everyone
BY ANDREW LECKEY
Copyright © 2007, Chicago Tribune
Published July 8, 2007

Mom and apple pie may be next.

How can anything as basic to American life as a home mortgage turn out to be a heavy burden on the investment world and perhaps the entire economy?

The answer is it seemed such a tried-and-true concept that it fell victim to the same unbridled optimism that fueled the 1990s technology boom: Invest in a sure thing before it is too late and don't sweat the details.

"I'm telling you, it can't miss," a taxi driver in northern Virginia said a couple of years ago, as he told me about the development where he'd bought a condominium under construction. He intended to sell it for a hefty profit immediately upon completion. "My buddy bought two."

My guess is both of those flippers wound up long-term condo owners with honest-to-goodness mortgage payments that weren't of the two-week variety.

The subprime mortgage market provides home loans to the least creditworthy borrowers, including those with troubled credit histories. Subprime is investment-speak for "loans you probably shouldn't make, but what the heck." Many of those loans have gone sour, which should be no surprise.

The extent of the subprime market had been talked about only in whispers and generalities. Lack of details from financial institutions has heightened the anxiety over its potential impact.

But the cat is out of the bag. That low-end market has whacked even high-end Wall Street.

Bear Stearns Cos. has bailed out one of its hedge funds felled by a portfolio of subprime loans, to the tune of $3.2 billion. And that's not the only problem fund at Bear Stearns, an aggressive player in the subprime market. Meanwhile, funds at other firms are similarly reporting big losses tied specifically to investment in risky subprime loans.

The stock market, fearing the potential economic damage, immediately runs scared on any hint of negative news.

If the Federal Reserve continues to hold steady on interest rates and corporate earnings are solid, some of the paranoia should ease. A number of experts say worry is overblown and won't have the extended impact that others are predicting. We can only hope that's the case.

But think back to all those portfolio managers and chief executives who pooh-poohed serious questions about the potential downside of subprime loans, giving the impression such questions attacked the American way.

Think back to real estate agents who urged clients to buy quickly. Think of aggressive lenders. Think of investment firms that snapped up mortgage portfolios.

Think of the people who yearned for a home or profits from a quick flip and were led to believe that paying their financial dues was unnecessary.

Most of all, think of your own family and resolve never to let it fall prey to optimism manufactured by others.

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Andrew Leckey is a Tribune Media Services columnist.